State's huge budget deficit defies easy solutions

By KEITH M. PHANEUF The Connecticut Mirror

When Dannel P. Malloy became the state's 88th governor on Jan. 5, 2011, he inherited a financial mess unmatched in Connecticut history.

The Stamford Democrat faced a state government on pace to spend almost 20 percent more than it would receive in its next budget - unless something changed dramatically.

Forced to fill a $3.7 billion shortfall, Malloy challenged legislators, unions, businesses and the public to embrace his "shared sacrifice."

"I truly believe Connecticut's best days are ahead," Malloy told lawmakers two years ago. "The tide is turning for us if we step up and work hard with courage and conviction."

But a sober look at the state's finances two years later shows that one-third of that historic deficit still remains.

Back in 2011, the steps he implemented included:

• The largest - $1.5 billion - tax increase in state history.

• A state employee concessions package that would freeze wages, curtail retirement benefits and promote both preventative health care and leaner government.

• The merger of 82 agencies down to 58.

• Cuts to public colleges and universities that would, he hoped, boost tuition no higher than inflation.

With a gap of $1.2 billion projected for the fiscal year that starts in July, Malloy not only is seeking more sacrifices, but he's also turning to taxes and some of the gimmicks he swore off two years ago.

He has proposed:

• Extending expiring tax increases on businesses and power plants.

• Reducing tax credits for working poor families.

• Cutting more funding to colleges and universities, even as tuition and fees continue to rise beyond inflation.

• Making deep cuts to hospitals and in health coverage for thousands of low-income adults.

• Raiding the transportation fund.

• Borrowing hundreds of millions of dollars to pay ongoing bills.

In submitting these steps, the governor cited an unusually sluggish recovery that plagues most states and that neither party foresaw.

But despite the warnings of many economists - and even after evidence of a lethargic recovery accumulated - the governor also took some chances with his budgets:

• He introduced a new multi-year program to fix the state employees' pension fund without a plan to fund it fully after the first year.

• He underfunded health care for the poor so that it didn't meet the demand anticipated by his own administration.

• His concessions deal with state unions - expected to cut annual costs by more than $900 million - would come up several hundred million dollars short.

When he took office, the 18 percent gap between projected costs and revenues was 3½ times the size of the deficit Gov. John G. Rowland and the legislature closed in February 2003.

And the political hurdle Malloy had to clear was as daunting as the fiscal problems he had to resolve, said Senate President Pro Tempore Donald E. Williams Jr., D-Brooklyn.

To close the deficit left behind by Gov. M. Jodi Rell, Malloy had to convince lawmakers that he would shield them from the public backlash for the tax increase - something his Republican predecessor refused to do.

Still, despite the massive challenge he faced, Malloy in 2011 had a bullish view of Connecticut's future.

According to the economic forecast he used to prepare his budget two years ago, unemployment would drop to 6.8 percent by the second quarter of 2013, and household income would be 11 percent higher than it was in 2011.

But two years later, Connecticut's jobless rate through March still hadn't cracked the 8 percent floor, and the administration now estimates household income growth since mid-2011 at less than 4 percent.

What does that mean for the state budget?

The administration thought in 2011 it would have $932 million more in tax receipts to spend in 2013-14 than it now is counting on.

Office of Policy and Management Secretary Benjamin Barnes, the governor's budget chief, questioned how many people would have known the nation's economy would remain so slow-moving more than five years after the start of the last recession. Entering this fiscal year, 31 states had to close projected shortfalls that totaled $55 billion to balance their budgets, according to the Washington-based Center on Budget and Policy Priorities.

Foley even more optimistic

As hopeful as Malloy's first budget might have been, it was pessimistic compared with the fiscal plan of his Republican opponent in the 2010 election.

Greenwich businessman Tom Foley had infuriated Malloy supporters for months by insisting that he could eliminate a cavernous deficit without any tax increases.

When pressed during the campaign to disclose how he would cover a $3.7 billion gap in one fiscal year, Foley told The Connecticut Mirror that he expected 40 percent of the problem - about $1.5 billion - to be solved by economic growth alone. Income, sales and other taxes would raise more because additional people would be working, getting raises and spending more.

Malloy's budget closed that deficit with about $2.3 billion in new revenue, including about $800 million stemming from economic growth to go with the $1.5 billion from tax increases.

But there were dissenting voices two years ago coming from Connecticut economists, who warned that this recovery would be far more meager, and take much longer, than its most recent predecessors.

"We said, 'This is not your father's recovery,'" Donald Klepper-Smith, chief economist for DataCore Partners in New Haven, recalled of his 2010 prediction for post-recession Connecticut.

Over the last five recessions, dating back to 1974, it has taken increasingly longer both for the nation and Connecticut to return to its employment peak, Klepper-Smith said.

The state has recovered only 48,600, or 40.1 percent, of the 121,200 jobs it lost during the most recent recession, which ran from March 2008 through February 2010, according to the state Department of Labor.

Pension fix hinged on rebound

Not all of Malloy's present fiscal woes can be attributed to bad economic luck.

Having demanded concessions from state workers in 2011, the governor sought to return the favor one year later, unveiling a plan to dramatically ramp up state payments into the cash-starved pension fund.

Malloy offered that plan in late January 2012, even though the administration had downgraded its revenue expectations for its current budget that same month as the economy lagged.

Malloy officials defended the red ink at the time, noting there was plenty of time for the economy to improve. But administration officials have reduced revenue estimates three more times since then, in April and November 2012 and again in January.

By the time Malloy released his 2013-14 budget three months ago - and had to close an overall deficit of $1.2 billion - he proposed scaling back the pension fix to spend $150 million less than originally planned.

And while another report this week finally raised revenue expectations for this year by $240 million, due largely to a one-time bump in gift tax receipts, it also lowered them for 2013-14 by $259 million. Based on those changes, the potential shortfall in the next budget approaches $1.5 billion.

Surging demand for Medicaid-funded health care has been another fiscal thorn in Malloy's side. But this is another example of the governor being plagued by a problem at least partially of his own making.

The governor's budget office estimated in November that Medicaid would cost the state $5.23 billion next fiscal year, but in February, the governor proposed spending $185 million less than that.

The governor and legislature budgeted $156 million less for Medicaid programs in the Department of Social Services this year than Malloy's own fiscal staff projected would be necessary.

The administration has tried to mitigate these Medicaid gambles by proposing cost-cutting measures.

But state legislators didn't warm to some of them. And federal Medicaid officials balked this spring at a series of cost-cutting restrictions Malloy sought for Connecticut's Medicaid for Low Income Adults program.

Through mid-April, Medicaid spending was running $247 million in deficit this fiscal year.